Companies make it a point to keep up with the current break-even point for their business operations. This particular figure is very important, since it identifies the point at which the company covers its expenses and begins to generate profits. Fortunately, the process used to calculate break-even points is relatively straightforward, requiring nothing more than having a good grasp of the total costs associated with the operation and the total amount of revenue that is generated by the business.
To calculate break-even points, the first step is to assess the costs involved with the operation. In order to determine a figure that is truly helpful, it is important to consider both fixed and variable expenses incurred by the business. Fixed expenses are any costs that are constant, such as a mortgage payment or a lease payment on a piece of equipment. With expenses of this type, there is no change in the amount of the cost from one accounting period to the next. Variable expenses do change each accounting period, including costs such as utilities and in some cases the volume of raw materials used in the production process. It is this shift in variable expenses from one period to the next that makes it necessary to calculate break-even points on a more or less regular basis.
With a firm grasp on the costs involved with the business operation, determining the total income or revenue generated for a given period is necessary in order to calculate break-even points for the operation. Generally, this figure will only include income that is generated as a direct result of the production process, and will not allow for any revenue generated by investments or holdings that are in the possession of the company. This has led some to say that break-even revenue is synonymous with sales revenue.
To calculate break-even figures, it is necessary to determine how many units of a product must be sold in order to cover all the associated costs. This involves taking the current unit price of the product and determining the number of units that must be produced to break even. For example, if the total costs involved in manufacturing 10,000 units of a given product comes to $10,000 US dollars, this means that the company must sell each of those units at a unit price of $1 USD in order to completely cover the costs. Should the product currently be sold for $1.50 USD per unit, and the business is able to sell 6,667 of the units produced, then all costs are covered and the company is able to break even on its production, meaning that no profits are generated but the company is not losing money from the operation.
Since variable expenses do shift over time, a business will calculate break-even points with each new accounting period, once all expenses are documented and sales figures are available. As long as the business is generating revenue that is above the break-even point, that means some sort of profit is being realized. Should sales fall below that point of breaking even, this means the company is losing money and needs to implement strategies to increase sales while also considering ways to minimize expenses in order to become profitable once more.
